Saturday, August 29, 2009

The cost of liquidity?

Speaking of high frequency trading, here's Zero Hedge on the Renaissance vs. Volfbeyn and Belpolsky matter. Related posts here and here.

130. While employed by Renaissance, Dr. Volfbeyn's superiors repeatedly asked him to assist Renaissance in conducting securities transaction that Dr. Volfbeyn believed to be illegal.

The illegality of these activites touched upon three main topical areas:

ITG-POSIT (The Dark Pool angle)

131. In particular, Dr. Volfbeyn was instructed to devise a strategy to defraud investors trading through the Portfolio System for Institutional Trading ("POSIT"). POSIT is an electronic trading system operating by Investment Technology Group ("ITG" ). POSIT collects buy and sell orders from large traders and attempts to match them.

132. On information and belief, POSIT is completely confidential. It does not reveal information about orders to anyone. For its customers, this confidentiality is an essential aspect of the system.

133. Renaissance asked Dr. Volfbeyn to create a computer algorithm to reveal information that POSIT intended to keep confidential [REDACTED]

134. Renaissance intended to, and did, use this trading strategy [the POSIT strategy] to profit [REDACTED]

135. Dr. Volfbeyn believed that [REDACTED] [the POSIT strategy] violated securities laws. He expressed his opinion to his superiors at Renaissance and refused to build the computer algorithm as they requested.

Limit Order Strategy [Stealing Liquidity]

139. Renaissance asked Dr. Volfbeyn to develop a computer algorithm [REDACTED] [the "limit order strategy"]

140. A limit order is an instruction to trade at the best price available, but only if the price is no worse that a "limit price" specified by the trader. Standing limit orders are placed in a file, called a limit-order book. Limit-order books on the New York Stock Exchange and NASDAQ are available to be viewed by anyone.

141. By [REDACTED], Renaissance intended to profit illegally.

142. Dr. Volfbeyn refused to participate in such activities. He explained that his refusal was based on his belief that the proposed transactions violated securities laws [2nd time RenTec allegedly used an illegel strategy]

143. Senior Renaissance personnel, including Executive Vice President Peter Brown and Vice President Mark Silber, attempted to persuade Dr. Volfbeyn to engage in the [REDACTED] limit order strategy, despite his objections. Mark Silber is the compliance officer for Renaissance, responsible for implementing systems to ensure that Renaissance does not violate the securities laws, and for protecting employees who complain about potentially illegal conduct.

144. On information and belief, Renaissance did not implement the [REDACTED] limit order strategy prior to Dr. Volfbeyn's termination. [What about after?]

Swap Transactions [The Naked Short Scam]

145. At all times relevant to this action, Rule 3350 of the NASD, prohibited NASD members, with certain exceptions from effecting short sales in any Nasdaq security at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid in the security.

146. At all times relevant to this action, Rule 10a-1 under the Securities Exchange Act of 1934 provided that, subject to certain exceptions, an exchange-listed security could only be sold short at a price above the immediately preceding reported price or at the last sale price if it is higher than the last different reported price.

147. During the period when Dr. Volfbeyn and Dr. Belopolsky were employed at Renaissance, plaintiff engaged in a massive scam [REDACTED] [the "swap transaction strategy"]



150. Renaissance conducted [REDACTED] in violation of Rule 3350 and Rule 10a-1. Renaissance also intentionally [REDACTED] in violation of SEC and NASD rules. [REDACTED] Renaissance profited from the strategy [REDACTED].

151. Researchers at Renaissance expressed their concern to Executive Vice President Peter Brown and other officials of Renaissance about the legality of these swap transactions, including concerns that the transactions violated the tax laws and securities laws. Renaissance failed to halt the transactions. On information and belief, the swap transactions are continuing and generate substantial profits for Renaissance.


LondonYoung said...

You may wish to mention that the two individuals who made these accusations against Ren lost their battle and were fired by Millenium.

Ian Smith said...

Of course they were fired. They have a conscience.

Unknown said...

This was a sort of kitchen sink countersuit to a claim RenTech made against Millennium re theft of trade secrets after hiring these two ex-RenTech employees. I don't know whether any of the claims are true, but Millennium ended up paying RenTech $20MM and firing the two researchers. AFAIK, they were not fired by RenTech, but left for greener pastures w/ Mr. Englander, conscience or no ( and I'm guessing no).

BTW, funny exercise: google "Izzy Englander"... not a savory reputation, though his track record for making money is a good one.

LondonYoung said...

To add color on the players and possible motives:
Ren usually hires people with no prior finance experience and pays them to develop trading stategies which Ren then considers to be Ren's property.
Millennium usually hires people who already know how to profitably trade and typically agrees to pay them a percentage cut of the money they make using Millennium's resources to trade.
Hypothetically, if a researcher in Ren's employ developed a profitable strategy, he/she could take it to Millennium and get a better payout - except that Ren might sue for intellectual property theft.

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